Investing in the electric car is definitely a long-term play. But potential buyers of
Tesla Motors Inc. stock later this year need to realize things are going to get worse for the company before they get better.

The Palo Alto, Calif.-based company filed a week ago for an initial public offering of about $100-million (U.S.); the exact timing of the IPO and pricing particulars are still unknown. Tesla Motors is capitalizing on being one of the United States' buzz companies. Its $100,000-plus Tesla Roadster is on the highways, as the company has sold more than 900 of the battery-powered vehicles around the globe. More intriguingly, it has revealed a new, lower-priced vehicle, the Tesla Model S, which it plans to sell for $49,900 (after a $7,500 U.S. federal tax credit).

The trouble, however, is the company plans on having the Model S ready in 2012 - "or possibly later," it says in the prospectus for its stock offering. It acknowledges many of the production and supply decisions for the Model S haven't been made, and it doesn't know where the factory for the new model will be located.

At the same time, the company plans to stop selling the current model of the Roadster after 2011 "due to planned tooling changes at a [parts]supplier," and won't introduce a new version of the Roadster until at least one year - at 2013 at the earliest - after it starts selling the Model S.

The drop-off in Roadster revenue, combined with the ramp-up in Model S manufacturing and selling costs, means losses at the electric car maker are going to become bigger, not smaller in the near term, the company admits. "We expect the rate at which we will incur losses to increase significantly in future periods from current levels," Tesla says in the prospectus.

That reverses a trend of narrowing losses as the company finally began delivering its Roadsters to customers. Through the first nine months of 2009, the latest financials Tesla included in its offering document, the company reported a loss of $31.5-million on sales of $93.4-million, down from a $57.3-million loss on just $580,000 in revenue in the same period of 2008.

To be fair, a short-term deterioration in performance is to be expected at this stage of the production cycle, as a company takes on the cost of producing a product before it can actually make the sales.

However, Tesla's own financial statements contain a far more troubling forecast for the company's long-term prospects. Tesla said it has taken a full valuation allowance against its deferred tax assets, essentially writing them down to zero.

Tesla had approximately $183-million of federal and $161-million of California state-tax operating loss carry-forwards at the end of 2008 available to offset future profits on its income taxes. But to use them, of course, Tesla has to have profits.

The full valuation allowance means it's "more likely than not," Tesla said, that it won't be able to use the tax deductions before they begin to expire in 2024 (2019 for the California carry-forwards).

"The fact that the company is taking a full valuation allowance against its deferred tax assets indicates that the company has little confidence in its ability to generate taxable income in the foreseeable future and, thus, it has little confidence in its ability to 'realize' its deferred tax assets," said Robert Willens, a corporate tax analyst at Robert Willens LLC. "It seems to me you can only draw one conclusion from a full valuation allowance: that the company's near- and medium-term profit outlook is, to put it charitably, far from assured."

Tesla warns potential shareholders of a host of other risks. For one, it believes at least a half-dozen established major manufacturers - it names Nissan, Ford, Daimler, Lexus, Audi, Renault, Mitsubishi and Subaru - are working on electric cars. That doesn't include the makers of hybrid vehicles who intend to add a plug-in option to give those cars limited electric capability.

"If they get the funding they need, from the IPO or other sources, then I believe they might for a while show some decent sales, but if the niche becomes big enough then the elephants will step in, grow the market themselves and take the lion's share," said Francis Gaskins, an analyst who specializes in IPOs at his website IPOdesktop.com.

In addition to their scale and financial muscle, the major manufacturers also benefit from a little-understood regulatory issue facing Tesla: Many U.S. states have strict laws about automobile dealerships that will likely prevent Tesla from selling cars to their residents, at least not easily.

In Kansas, Tesla says, an auto manufacturer can't deliver a car to a customer except through a licensed dealer; as a result, Tesla may have to open a physical store to sell cars there. Texas, however, does not allow manufacturers to be licensed as dealers, Tesla said. Other states may require a service centre for the cars before they can be sold.

Before Tesla could open a "gallery," as it calls its showrooms, in Boulder, Colo., the state required the company to get both dealer and manufacturer licenses, Tesla said.

*****

At a glance

Tesla Roadster

Introduced: 2008

Acceleration: Zero to 60 miles per hour in 3.9 seconds Range: 380 kilometres on a single charge

Sold: 937 to customers in 18 countries

Price: $109,000 (U.S.) before a U.S. federal tax credit of $7,500

Tesla Model S

Introduced: Targeted for 2012

Range: From 260 kms to 480 kms on a single charge

Change: To include a third row with two rear-facing child seats, for a seven-passenger sedan

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